Fiddling with your National Insurance

Last Updated on 8 March 2024

Figures below were correct as of 8 March 2024

More changes to National Insurance (NI) were announced by the Chancellor Jeremy Hunt on Wednesday (6 March 2024).

As it happens, I was training at Channel 4 that day, so we were able to look at how NI was at the beginning of the day, and after lunch compare it to the announced changes.

The reaction was underwhelming in the room! That’s because the changes weren’t very radical except to reduce NI rates again.

It had already been announced in November that they’d be reduced from January. This was another reduction from April.

In fact, this is quite unusual. The percentage reductions are quite large historically, and they’re being brought in really quickly. (Anyone would think there’s an election coming.)

For freelancers (and others) taxed through PAYE, this means NI was 12% up to December 2023, then 10% from January 2024, and will be 8% from April 2024.

For sole trader freelancers, NI Class 4 will be 6% for the tax year 2024-25. Originally it was planned to be 9%.

This is definitely a reduction in personal taxes for working people.

But what is NI?

NI is a tax, alongside income tax, but it’s only paid by working people. This means older people pay income tax on pensions, but not NI contributions.

Having an NI record brings you certain benefits, so it’s quite an important tax for that reason alone.

One benefit is the ‘state pension’ which you get in full if you make 35 years’ worth of NI contributions through your working life, and reach the state pension age. [Check your state pension age on gov.uk.]

There are other benefits which rely on your having made some NI contributions, or at least having an NI record of some sort. Maternity allowance is one.

Why not just reduce Income Tax?

Reducing income tax would be an option for any Chancellor. But there are three ways income tax differs from NI.

1. NI is set for the whole of UK in Westminster. But income tax is set locally in Edinburgh for Scottish residents and (in theory) in Cardiff for Welsh residents.
   Fiddling with income tax might run the risk of being ignored in the Scottish Government or in the Senedd in Wales.
2. NI is a tax on working people, so you could claim that you want to encourage people to work by reducing it. This is exactly what Jeremy Hunt said.
3. NI goes down substantially (to 2%) if you earn over roughly £50,000. So unlike income tax, NI goes DOWN when you earn more. Income tax goes UP when you earn more. This appears to be completely ignored by the news outlets and politicians.
   I think most people would consider it bizarre that the people who earn more pay a lower rate of NI on their top earnings. (Surely, the broadest shoulders blah blah…?)

By the way, there is a myth that NI is linked to the NHS. It isn’t really. NI goes into the same pot as income tax to run the country. And you get use of the NHS because you’re resident here, not because you pay NI.

What will freelancers notice?

If you’re a PAYE freelancer you will possibly already have noticed one reduction in your NI contributions from January. You will notice another reduction from April.

If you’re a sole trader freelancer (i.e. registered as self-employed) you will notice a reduction at the end of 2024-25 when you come to do your tax return and then get a tax/NI bill.

Of course that will be after the next general election, so you might think it’s the new government that’s rewarding you! (Irony alert)

If you’re not sure what I mean by different types of freelancer, please have a look at my explanatory page here >.

Any other fascinating NI factoids?

For sole traders NI has been simplified this year.

Class 2 is now entirely voluntary, and only meaningful if you have profits less than £6,750 AND you have no other way of making NI contributions.

Above that level of profit sole traders get their NI record credited to them for free.

You pay extra NI (Class 4) on profits above £12,570 in the year. That’s the one that’s being reduced, as explained above.

Posted on 08 March 2024